Saputo Inc. (TSX: SAP) is a dairy processor and cheese producer and has presence across Canada, the USA, Argentina, the United Kingdom, and Australia and sells products across more than fifty countries. 

Key Updates:

• Bullish Outlook amidst Sluggish Economic Scenario: In order to combat the ongoing inflation, the company would increase its product prices in FY23, which is in line with the pricing protocols. This is likely to benefit the company’s margins in the coming days. Current consumer trends in key categories are likely to remain positive, while the management expects its export market to recover in FY23 supported by improvement in the export market and supply chain management. Lastly, we expect a meaningful recovery in earnings in FY23, driven by the full impact of price increases, improved productivity and fixed cost absorption done by the company.
  

• Foray into the eCommerce segment: During FY22, the company introduced its eCommerce website Nibbl, wherein the company offered direct-to-consumer website with delivery available in Ontario and Québec. This is likely to enhance the company’s sales volume and would lead to an increase in the market share. Notably, the management is planning to expand its delivery in additional Canadian provinces during fiscal 2023.
  

• New Launches to support upcoming operations: In FY22, the company expanded its category-leading Armstrong cheese range and also launched several new and innovative products in high-growth and value-added formats. Notably, the group would continue to support them through traditional, digital, and social media advertising as well as various trade activities. Additionally, the company also made its first commercial production of plant-based beverages at its Port Coquitlam facility which marked the beginning of the co-manufacturing activities for various dairy alternative beverage companies and retailers in North America.

 FY22 Financial Highlights:

• SAP announces its full-year results, wherein the company posted revenue of CAD 15,035 million in FY22, up from CAD 14,294 million in FY21. The growth was primarily driven by higher revenue from all the geographies it operates.
• Total operating costs stood higher than CAD 13,880 million versus CAD 12,823 million in FY21, due to increase in input costs like employee benefit expenses, raw materials and consumables, and other general & administrative costs. Moreover, a higher depreciation & amortization remained as a drag. Hence, earnings before income taxes stood lower at CAD 405 million, as compared to CAD 844 million in FY21.
• The company reported a slide in net earnings at CAD 274 million v/s CAD 626 million in FY20, due to lower earnings before income taxes, partially offset by lower income taxes.
  

Risks associated with the investments:

The group’s income is interrelated with international cheese and dairy ingredient market prices, while price volatility is likely to hamper the company’s profitability and cash flow. Higher input costs coupled with changing consumers preferences could dampen the overall company’s performance.

 Valuation Methodology (Illustrative): Price to Earnings based

 Analysis By Kaline Group 

Stock Recommendation:

Overall, the retail market segment continues to perform well, and we expect the company’s sales to keep pace with pre-pandemic levels. This is likely to contribute to the overall volumes and income in the coming days. We have valued the stock using the price to earnings based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Premium Brands Holdings Corp, Maple Leaf Foods Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of SAP at the last closing price of CAD 27.13 on June 16, 2022.

One-Year Technical Price Chart (as on June 16, 2022). Analysis by Kalkine Group

The reference data has been partly sourced from REFINITV

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